Retailer Margin Expansion: Who's Still Climbing and Who's Peaked

Retailer margins are telling two distinct stories in the market. On one hand, discounters and Amazon have seen their gross and operating margins continue to rise over the past five years. In fact, Amazon's margin expansion has nearly doubled with its operating margin increasing from 5.3% to 11.2%. However, this growth rate is slowing down, with a gain of only 0.4 percentage points in the last year.

The structural tailwinds driving Amazon's success include its high-margin cloud business and advertising segment. Additionally, efficiency gains from post-pandemic right-sizing have largely been captured, suggesting that Amazon's operating margin has reached a ceiling around 13-15%, where it would converge with mature platform retailers.

Off-price retailers, such as TJX Companies and Ross Stores, are also expanding their margins. Their off-price model structurally compresses buying costs, allowing for 2-3 percentage points more operating margin expansion before hitting the historically established ~14% ceiling that discount retail typically faces.